The word “interest” has two meanings in economic analysis. In a broad sense, it means the difference between the revenues of an activity and all the costs related to that same activity. This corresponds roughly to what in everyday language is meant by profit. Adam Smith and classical economists had indeed spoken of profit rather than interest when they spoke of the said difference. On the other hand, in the narrow sense, the word interest means the remuneration for a loan of money. By the interest rate is meant the ratio between the monetary sum loaned and the monetary sum obtained in remuneration of this loan. By interest income is meant the monetary sum received in respect of this remuneration. In what follows we will deal with this rate and with this income.
Overwhelmingly, contemporary economists are not interested in the moral analysis of the interest rate. Even Catholic authors neglect this subject, an intellectual desertion on equal footing with the disappearance of the old ban on usury. Until 1917, this ban could be found in the Codex Iuris Canonici (§1543), only to be deleted from the 1983 edition without any comment. All the same, a certain number of authors who turn to this subject today are still convinced of the relevance of the reasoning which supported the prohibition of usury: “Lending at interest and related practices are, as such, inequitable.” (Ramelet 2005, p. 25; see also Hochreiter 2012, Marie-Jeanne 2013). It is therefore not superfluous to devote a few pages to it.
The interest rate is not a simple and uniform phenomenon. It is “complex” in Menger’s sense (1871, 1883). It results from the interplay of a multitude of different causes, each of which has specific consequences. The analysis of the moral aspects of the interest rate must therefore avoid falling into the trap of considering these multiple causes in a global or holistic way. It needs to look closely at each of them, first separately, then in their interrelationships, and then in their combination.
In this paper we will first take a look at the nature and the different causes of the interest rate, from the point of view of economics (I). Then we will provide a concise moral analysis of incomes from money loans (II). We conclude with a critical discussion of the doctrine of Aristotle, developed further by Saint Thomas and Heinrich Pesch, according to which interest income is inherently illegitimate and could only be justified by reasons extrinsic to the loan (III).
I. The Causes of Interest Rates
The nature, causes and consequences of income from money lending are very much the same as from other income from capital (A). We must therefore first study these universal aspects (B) and then discuss the particular features of lending money (C).
A. Capital and its income
Classical economists distinguished between interest rates, profits, and rents. They viewed interest rates as remuneration for monetary loans, profits as remuneration for entrepreneurial activities in commerce and industry, and rents as remuneration for real estate investments.
However, since the end of the 19th century, in line with the work of Eugen von Böhm-Bawerk and Frank Fetter, economists have considered all these remunerations to be special forms of remuneration for capital employed. Indeed, industrial activities, rentals of real estate, and the granting of monetary loans are particular manifestations of the use of capital (see Böhm-Bawerk 1921, Fetter 1977 [1904], Knight 1959 [1932]).
The capital of a person (or of a family, an association, a firm, or a local authority) is the monetary value of all the economic goods that this person uses in order to earn future monetary income (Menger 1888). The apartment that a family owns and rents for a fee is part of that family’s capital. The monetary sums that it deposits in a savings account are also part of it; and machines and installations belonging to the family business, as well as the expenses incurred to purchase raw materials or to pay for the services of its employees are also included.
Capital thus defined is a concept rooted in the reality of human action. Capital is not a collection of material economic goods, but an expression of their monetary value – of the economic significance these goods have for a person, and in the eyes only of that person, who trades with other people. It is a tool of human thought and choice (Simmel 1989 [1900], Mises 1998 [1949]). Capital cannot be observed by looking at or comparing the visible aspects of various economic goods. It must be estimated in monetary terms in light of a speculation of the future and of projects that require trading with other people. It is the coherence of a business plan that unites the various economic goods that make up capital. Ultimately, it is human action that creates a common denominator for those goods which, from a physical point of view, do not have one.
The monetary values of all elements of capital are related to one another by the choices of the capitalists. The owner of capital chooses to buy or sell real estate; he chooses whether or not to purchase the services necessary for the manufacture of various products; he chooses whether or not to lend money for interest. All of these choices are linked. He can sell real estate and use the proceeds to start a bakery. He can liquidate his business and lend the proceeds, for remuneration, to a family who wishes to buy a house. It is therefore possible, thanks to market exchanges, to change the manifestations of capital. Any capital can, so to speak, have very different “garments” or “vestments.” It is “in-vested” here or there, but we cannot lose sight of the fact that it is always capital that is committed. All of these investments, regardless of their physical appearance or legal form, are part of the capitalist’s “investment portfolio.”
For the same reason, there is also, over and above the diversity of the forms of remuneration of capital, a unity of their nature. Profits, interest, and land rents are different manifestations of the return on capital. Thanks to market exchanges, all these remunerations are related to one another. In a free market economy, there is a tendency towards the equalization of returns on capital, whatever the form. Ceteris paribus, land rents tend to achieve the same level of return, relative to the invested capital, as profits and interest rates. For example, if it is possible to make your capital earn a higher return in a shoe repair shop than by lending it on the financial market, then some capitalists will stop lending their capital to borrowers and rather invest it in a shoe repair shop. As a consequence, the return on capital in the loan market will increase, as capital is now scarcer there; and its performance in the shoemaking sector will decline, because the services of shoemakers become more abundant.
This being said, let us now study the different causes of this complex phenomenon that is the gross return on capital, by first investigating the general causes, common to all forms of capital, then underlining the particular factors that come into play in the case of money lending.
B. The Causes of Gross Capital Income
Like all income, income from capital, whatever its concrete form, is determined by two immediate causes: demand and supply. In the present case this is the demand for capital and the supply of capital. It is not advisable, in the limited context of this paper, to go into a detailed analysis of the capital market (see in this regard Rothbard 1993, chaps. 5-8 and 12). In the following overview, we shall limit ourselves to distinguishing the most important remote causes that determine the supply and demand of capital. Some of these are only supply-side, others only demand-side, and still others are felt on both sides of the market.
Preservation of Savings: Premiums
A first cause is the investor’s desire to preserve the monetary value of his savings. He invests it, or entrusts it to third parties, only if he may reasonably expect to be compensated for any damage and loss of its monetary value. These damages are commonly referred to as “premiums” or “compensations.” They can be contractual (as in money loans) or residual (as, for example, when buying a share of a company on the stock market). Such compensations are most notably expected in regard to the various risks associated with investments: market risks, liquidity risks, counterparty risks, operational risks, price-inflation risks, and political risks. We can distinguish as many premiums as there are damages, but they all go back to the motive of preserving the monetary value of savings.
Notice that the risk premiums of an investment cannot be defined in absolute terms, but always in relation to the risks of an alternative investment of the savings concerned, in particular the risks of hoarding. This has the consequence, among other things, that the risk premiums of an investment can drop to zero, especially when the saver has to fear expropriation or natural calamity if he hoards his savings. In these cases, he would run less risk in investing his savings than in hoarding them, so that the risk premiums of the investment would be zero, while there would be hoarding only if it was accompanied by a risk premium.1
Capital Growth: Pure Returns on Capital
A second cause of the gross return on capital is the willingness of the saver (but also of the companies that use his savings), not only to preserve the monetary value of his savings, but to grow it, to use it as a source of future income – in other words, to use it as capital. This cause corresponds to what is commonly called the “pure return” of capital.2 Economists have developed a large number of theories to explain the precise mechanism by which the will of the capitalist produces this pure return (overviews in Böhm-Bawerk 1921, Herbener 2011).
Contemporary economists tend to equate interest income with a compensation for “time preference.” Just as the gross interest rate includes various “premiums” to compensate for the risks to which the lender is exposed, pure interest is interpreted as compensation for current consumption that the lender must forgo. The lender could devote a sum of 100 euros for his daily consumption, and maybe that is indeed what he would like to do. In this case, the future remuneration that he is promised, if he is willing to lend this sum, serves to compensate him for his present sacrifice.
Let us emphasize, however, that pure remuneration does not depend solely on the will of this or that saver, but that it emerges through the competitive interactions between all savers and users of available savings, that is, through supply and demand.
Facilitating Higher Consumption in the Present
A third cause, which concerns the demand for capital, is the desire to ensure consumption in the present that the demander of capital cannot achieve by his own means. We are thinking here primarily of consumer loans, but this phenomenon needs to be approached from a broader perspective. It also includes remunerations received for salaried work and for land rents. Indeed, one of the most fundamental motivations of every employee is to achieve, through employment, a level of remuneration (and therefore consumption) that would otherwise be inaccessible to him. That’s why he trades his labor, his energy[TM1] , for a salary. However, this salary is, from an economic point of view, a monetary capital invested by the company which hired the employee. The labor market is part of the market for money capital. Firms offer capital and demand labor, while wage earners offer labor and demand monetary capital (we refer the reader again to Rothbard 1993, who offers a very comprehensive discussion of these matters).
That being said, let us note that the demand for consumer credit, too, is motivated by the desire to ensure consumption in the present that the applicant for capital cannot achieve by his own means. Since this case is central to the moral issues associated with lending money, we will discuss it below, in the relevant parts of this work.
Gifts Hidden in Exchange
A fourth cause is the willingness to donate. The saver consumes his capital without preserving it at its previous level. The investment is then mixed with a donation, which can be partial or total. For example, the saver may lend money to a hospital, and in exchange the owners of the hospital promise him certain future payments which will not be enough to preserve the value of the savings.
Investment Errors: Economic Profits and Losses
A fifth cause is not intentional, like the first four, but unintentional or spontaneous. These are the errors of the agents. The investment of savings is inevitably associated with the problem of anticipating future conditions. When this anticipation is wrong, the gross return on capital may either fall below or rise above the expected level. These positive and negative differences are called “economic profits” and “economic losses” respectively (to be distinguished from accounting profits and losses). Note that the errors in question here are pure errors, that is to say errors not anticipated and therefore not included in the economic calculation at the time of the decision to grant the loan, unlike errors anticipated and included in the economic calculation of the lender for the various bonuses and compensations that we have already mentioned.
Government Interventions: Forced Incomes
Government interventions (or interventions by other social authorities) represent a sixth and final cause of gross capital income. It should be noted from the outset that the influence of these interventions is unfortunately quite neglected in contemporary monetary and financial theories. An intervention in the sense that interests us here is a partial violation of private property rights. The State intervenes in particular (a) by prohibiting certain activities, (b) by regulating certain activities and (c) by confiscating the income or the wealth of certain people, in order to pay these sums to other people.
C. Specific Causes of Remuneration of Money Loans
Let us now turn to the specific circumstances concerning the remuneration of loans of money.
The Economic Rationale for Lending Money
At the heart of money lending is the willingness of the investor to preserve the monetary value of his savings. Indeed, the loan is an exchange between a sum of monetary savings of a person A and the promise given by a person B to repay this sum in the future and to pay person A a gross remuneration, which therefore corresponds to the gross interest rate earned by the saver. Thanks to the loan, the latter can reduce the market risk of his investment while being exposed to a counterparty risk. In other words, the saver is less exposed to the risk of fluctuations in prices and volumes traded on the market (because his future remuneration is fixed in advance by the contract with the debtor). On the other hand, for the same reason, his fortune now depends on the debtor’s future ability to honor his promise. We can infer that this exchange of risks is economically justified (1) in particular, if the overall risk can thus be reduced; and (2) in general, if the creditor can achieve a particularly attractive combination of remuneration and risk.
In some parts of the finance literature, we find the notion that the risks associated with money lending are nil, or may be nil, in the case of a high-quality lender. The most important example is modern finance theory (Markowitz, Sharpe, Fama, Merton, and others), which is based on the assumption that at least one “risk-free” asset exists. However, it should be emphasized that this is a completely fictitious hypothesis which is not intended to describe a potential feature of economic reality, but which rather serves to facilitate the mathematical and econometric modeling of this reality. There are simply no human actions without some uncertainty, and therefore without risk.
This also applies to money loans. It can be argued that the actions of a firm are riskier than the debts contracted by the same firm. We can consider that the loans granted in the Middle Ages were less risky than the loans today, because in the past insolvent debtors became in practice the slaves of their creditors, while today they often get away with impunity. But loans have never been, and are not, risk-free.
Money Lending Under the Influence of Government Interventions
Some economists consider that public debts, guaranteed by the “printing press” of central banks, are risk-free assets for their owners.3 But this argument is fallacious, too. On the one hand, turning on the printing press reduces the real value of all money units. Central banks can prevent creditors from suffering from a state default, but they cannot protect them against the diminished purchasing power of the money that is repaid to them. On the other hand, to the extent that the intervention of the central bank reduces the risks run by government creditors (without reducing them to zero), this effect results from a redistribution of risk. The risks incurred by creditors are reduced, but at the cost of increased risks for other market participants, including the risk of inter-temporal disequilibria.
Government intervention is particularly important for money lending and therefore for setting interest rates. These financial interventions may be of a repressive, but also of a permissive nature. They are repressive, particularly in the case of interest rate caps, or caps on the volume of bank loans. They are permissive when they come in the form of refinancing out of the central bank’s printing press.
This latter type of intervention is particularly relevant here. Indeed, central banks, thanks to their printing press, can increase the supply of credit without technical or commercial limitations. By refinancing the banking sector, they facilitate the creation of money by commercial banks and, thereby, the multiplication of money loans. In other words, central banks have the power to lower interest rates while increasing the volume of credit, as long as there is a demand for additional credit. And they can stimulate this demand by relaxing the conditions for granting their loans (maturity, collateral, counterparties).4
Finally, it should be emphasized that an expansionary monetary policy which perpetuates moderate and positive price-inflation rates – such as has been pursued in almost all countries since World War II – creates ideal conditions for the growth of credit markets (see Hülsmann 2026). When the purchasing power of monetary units steadily decreases, then money hoarding is discouraged in favor of financial investments, whereas the demand for credit is stimulated, because real debt decreases over time.
II. The Ethics of Interest Payments
Having examined the nature and causes of the interest rate, let us now turn to the analysis of its moral dimension. Lending money is an inter-temporal exchange, the terms of which are contractually fixed. The debtor receives a conditional payment in the present, which allows him to carry out his plans. The creditor receives future payments, which pay off his loan and provide him with income.
We shall argue that the income from money lending is intrinsically just and good, especially also from a Christian point of view, and in particular as regards its “pure” component – that which results from the will of the saver, not only to preserve the monetary value of his savings, but to grow it, to use it as a source of future income (A).
However, incomes from money lending, although intrinsically just and good, can be vitiated for extrinsic reasons, especially in the case of consumer loans, but also when they are realized through unjust institutions (B).
A. The Intrinsic Legitimacy of Income Obtained by Money Lending
We direct our attention from the outset to the most contested component of these revenues, namely, the “pure” component which is obtained by the sole fact of having consented to lend, without invoking “extrinsic reasons” to the loan, such as risk premiums. Indeed, the latter have never encountered objections in principle from moralists. The only component that is regularly contested is that of pure interest – income obtained solely because of the creditor’s desire to grow his savings, and the debtor’s willingness to pay it.
We will first quickly review the biblical evidence and then consider the theoretical reasons that weigh in favor of the legitimacy of pure interest incomes, both from a personal or microeconomic point of view, and from a global or macroeconomic perspective.
Biblical Evidence on Pure Interest
Sacred Scripture seems to admit the legitimacy of interest. According to Saint Thomas Aquinas (ST II-II q. 78 a. 1, obj. 2), in Deuteronomy (28:12) we read: “Thou shalt fenerate to many nations, and shalt not borrow of any one.”5 The practice of collecting interest as such is here not called into question. The prohibition concerns the debt economy and charging interest to the people of God: “Thou shalt not fenerate to thy brother money, nor corn, nor any other thing, but to the stranger.” (Deuteronomy 23:19-20) As we have already noted, this prohibition concerns in particular the consumer loan granted to the poor: “If thou lend money to any of thy people that is poor, that dwelleth with thee, thou shalt not be hard upon them as an extortioner, nor oppress them with usuries.” (Exodus 22:25)
Likewise, in the New Testament, Christ evokes the reappearance of interest in a parable as being taken for granted: “At My coming I might have exacted it with usury.” (Luke 19:23) In the Sermon on the Mount, He exhorts His disciples to “lend, hoping for nothing thereby” (Luke 6:35), but He does not forbid interest as such.
In short, there seems to be no biblical evidence that interest per se is forbidden. Saint Thomas, before rejecting this consideration, sums up the argument as follows: “Further, it does not seem to be in itself sinful to accept a price for doing what one is not bound to do. But one who has money is not bound in every case to lend it to his neighbor. Therefore, it is lawful for him sometimes to accept a price for lending it.” (ST II-II, q. 78, a. 1 obj. 5) Saint Thomas also brings up another very crucial consideration: “Further, anyone may lawfully accept a thing which its owner freely gives him. Now he who accepts the loan, freely gives the usury. Therefore he who lends may lawfully take the usury.” (ST II-II, q. 78, a. 1 obj. 7) This argument deserves to be deepened by underlining the moral implications of free consent between the creditor and the borrower.
The Legitimacy of Pure Interest is Rooted in the Mutual Benefits Provided by the Exchange
The pure interest rate is agreed upon in the exchange between the creditor and the borrower. As in any exchange, this agreement is a priori beneficial for both parties. Everyone wins because what they receive is more important to themselves than what they give away. Otherwise, the exchange would not take place.
If Paul trades his apple for Peter’s pear, then both win. Paul wins because for him the personal value (the use value, the subjective value) of the pear is greater than the personal value of the apple. Peter also wins, because for him the personal value of the apple is greater than the personal value of the pear.
The same is true when Paul lends 100 euros to Peter in exchange for Peter’s promise to pay him 105 euros next year. Paul wins because he prefers to get 105 euros in a year rather than keeping his 100 euros now. Peter wins too, because he would rather get 100 euros now with the obligation of paying 105 euros in a year.
In short, the immediate motive for the loan at interest is always to be found in the personal or subjective advantages it provides to both parties. It cannot be said that only the lender wins. The debtor also wins. If we neglect the personal dimension of the exchange to consider only its material dimension, we could have the impression that only the lender wins at the expense of his debtor, because he obtains from the latter, in the future, a sum of money greater than that which he gives up in the present. But like any purely materialistic perspective, it leads to error when it comes to assessing the economic and moral significance of exchange.
Let us take this consideration further by emphasizing, on the one hand, that the pure remuneration of the loan, as such, is just and good from the point of view of the contractors; and, on the other hand, that, in a natural economic order, based on respect for private property rights, this remuneration is also just and good from the global point of view of the economy as a whole.
The Legitimacy of Interest Payments: Personal or Microeconomic Point of View
The lender asks for remuneration, as we have said, because of his desire to grow his savings. Things are not different if we interpret the pure remuneration of a loan as a compensation for the “time preference” of the lender.6 In all cases, the lender gives up his savings because he is promised pure remuneration in the future. This intention to obtain pure remuneration is legitimate, because it is a priori just and good for each and anyone to obtain income by exchanging the economic goods for which they are responsible: their work, their word, and their real and personal property, including money.
Let us emphasize that it is their origin in exchange that makes these incomes a priori just and good. Exchange makes them just because exchange demonstrates agreement. Exchange makes them good because the agreement implies that the debtor is happy with it. True, he owes the lender in the future more money than he borrows now, but to him that future amount is less valuable than the smaller amount he obtains in the present. The exchange proves a priori that the creditor is rendering a service to his debtor.7
This is why we believe that pure interest income is intrinsically just and good from the microeconomic point of view of creditors and debtors. Let us now see that it is also justified from a global or macroeconomic point of view.
The Legitimacy of Interest Income: Global or Macroeconomic Point of View
The pure remuneration of a loan is not only just and good from the microeconomic point of view of the contractors. It is also justified by the consequences it entails for the economy as a whole. Pure remuneration plays a real social function which has at least seven dimensions.
First, the pure remuneration of savings creates a division of labor in finance. Indeed, thanks to it, market participants are encouraged to save beyond their personal needs. Some of them start saving for others and trading those savings in financial markets. For these “savings specialists,” the sheer compensation is an incentive to save more than they would otherwise.
Second, this financial division of labor strengthens the social bonds between individual persons. By exchanging their savings, especially on the loan market, savers become dependent on borrowers. The latter, by promising a future repayment, oblige themselves to the creditors.
Third, these additional savings tend to strengthen economic growth. They can fuel longer, more roundabout production projects and a more extensive division of labor, which ultimately leads to greater output, for the benefit of all market participants, but especially for the benefit of the most deprived.8
Fourth, since the exchange of savings occurs through supply and demand, there is a tendency to establish an equilibrium price. Excessively high and excessively low compensation, which can prevail when financial markets are underdeveloped, tend to disappear. An equilibrium price sets in which, although fluctuating over time according to variations in supply and demand, is a meson, a just middle ground which reflects the appreciation of the available savings both by the savers and by the users of these savings.
Fifth, the pure remuneration of savings regulates its overall volume. An increase in this remuneration tends to trigger greater savings, and vice versa.
This implies, sixth, that there is in a natural market economy a tendency to saturate the accumulation of capital. Indeed, due to the law of diminishing marginal utility, any increase in savings leads to a downward trend in its pure remuneration. The greater the savings, ceteris paribus, the lower the incentive to save even more. In a market economy, the profit motive therefore finds a natural limitation, which prevents the growth of capital from becoming an objective in itself.
Seventh, the pure remuneration of savings is the central transmission belt of the inter-temporal coordination of productive activities. It guides and channels investment choices and human cooperation – as well as, inversely, non-investment and non-cooperation. In this regard, lending money plays a particularly important role, because the income resulting from it – unlike the residual income that results from other investments – is already visible in the present.
B. Corruption of the Legitimacy of Pure Interest Income
We have just presented the main considerations that lead to the conclusion that pure interest income is a priori, or intrinsically, just and good. We have also mentioned that this legitimacy in principle can be called into question by formal flaws as well as by substantive flaws that are extrinsic to the loan contract.
In what follows, we will recall the formal defects and then devote our attention to the substantive defects. Among these, there are two that deserve special attention. First, the legitimacy of income from exchange may be vitiated by the fact that the exchange is materially dependent on unjust institutions. Second, it is appropriate to comment here on the categorical warning of Saint Paul against debt.
The Formal Legitimacy of the Money Loan Contract
Let us first neglect the questions related to the substance of the contract and look only at its form. From this point of view, a legitimate loan of money presupposes (a) that it is freely committed; (b) that the creditor is the lawful owner of the amount he lends; (c) that the debtor’s promise is valid; (d) that there is a genuine agreement between the creditor and the debtor on the terms of the contract; and (e) that it is objectively possible to perform it. Where these conditions are not all met, the contract is by definition void because it is not a true contract. Then any sums which might have been loaned, or which would have been received as pure interest, must be returned.
This particularly concerns cases of fraud, which may be in violation of condition (b) or condition (c). Anyone who lends money that is not their own, or someone who borrows without using the funds as promised, is committing fraud. The sums collected under such contracts are unjustified appropriations.
There is also no contract if the debtor is unable to pledge his future actions with a present promise. This inability may be due to his age, inexperience, lack of judgment, weakness of will, or an emergency. In practice, it is not always easy to see clearly whether obstacles of this type are really present. In general, legislators set certain criteria to facilitate the application of this principle. For example, the German Civil Code provides that a contract is abusive or usurious whenever one of the partners obtains extraordinary advantages thanks to necessity, inexperience, lack of judgment, or weakness of will of the other (BGB §138, Art. 2). Likewise, in French law, article L212-1 of the Consumer Code defines unjust clauses: “in contracts concluded between professionals and non-professionals or consumers, clauses are abusive if they have as their object or effect the creation, to the detriment of the non-professional or the consumer, of a significant imbalance between the rights and obligations of the parties to the contract.” In French law, professionals are generally considered to be the “strong” part of a contract, and non-professionals as the “weak” part. Also, financial intermediaries have fiduciary obligations, to a greater degree than ordinary debtors, towards their creditors who engage them in a professional capacity.
Even where there is perfect agreement between the two parties, the contract may be illegal or void if its terms are obscure or contradictory. An important example is furnished by the contracts underlying bank deposits which give the owner of the account an immediate right of withdrawal, while allowing the banker to commit the same funds to future purposes. As a rule, this contradiction is obscured by the vague terms of these contracts (Rothbard 2015 [1963], Hoppe, Hülsmann and Block 1998, Hülsmann 2003, Bagus and Howden 2013, Bagus, Howden and Gabriel 2014, Hülsmann and Scrive 2016).
Unfortunately, the same imprecision is found in legislation. It is quite astonishing that there seems to be no Western country whose banking law gives a clear definition of the terms “account” and “deposit.” Huerta de Soto (2008, chap. 1) argues that inaccuracies of this type are not accidental, but systematic and lasting; they have always been a characteristic feature of the statutory laws pertaining to monetary creation by commercial banks.9 The result is an institutionalized opacity that Jacques Bichot has rightly described as a structure of sin. He stresses the implication (2009, p. 85; translated by the author): “It is not the financial market that is a structure of sin. Structures of sin are institutions and mores that have been introduced into the market to distort its functioning, to introduce obscurity where the market requires good-quality information.”10
The Legitimacy of Loan Financing and Saint Paul’s Warning Against Debt
Having dealt with the technical flaws, let us now consider the substantive defects which, although extrinsic to the nature of the money loan, may invalidate a concrete loan due to a particular circumstance. We start with the nature of the projects that are financed by loans.
Any contract is void when it has a criminal purpose. All contracts which have as their object the financing of criminal activities are void and the income received as such is a priori illegitimate.
However, the application of these considerations should not be schematic, but requires individual moral discernment. What is illegal is not always immoral, for there are tyrannical laws and absurd laws. Everyone must therefore follow his conscience (see St. Thomas, ST I-II, Q19).
From a Christian point of view, all contracts which have as their object the financing of immoral activities, even if they are legal, are a priori void and the income received as such illegitimate. This may include, for example, funding a tyrannical government or a government openly opposed to Christian faith and morals, as well as the funding of abortions, prostitution, etc.
Christian moral theology also knows Saint Paul’s very stern admonishment: “Owe nothing to anyone, except to love one another [...]” (Romans 13:8 [NAB]) This famous warning is neither conditioned, nor nuanced. From a logical point of view, it is a categorical and apodictic appeal. Saint Paul opposes all forms of debt. With regard to the loans of money, at the limit, one could argue that the Apostle did not know in his time anything about producer loans and that, therefore, his exhortation concerns only, or at least primarily, consumer loans.
Indeed, we can distinguish three types of debtors: those who use the loan to invest the borrowed sums, in particular in projects which are supposed to yield to the debtor a return even higher than the rate which he must pay to his creditor; those who use the loan to ensure their survival; and those who use the loan to anticipate consumption without their life depending on this consumption.
In the first case, the remuneration of the loan does not pose a priori any problem from the Christian point of view. The loan is here just a particular form of ensuring the financing of a production which, in the long term, will increase the possibilities of satisfying human needs. The lender participates in the income from this production. His participation takes a different legal form from that of the shareholders who buy shares in the company concerned. But economically it is essentially the same thing (Mises 1998 [1949], Rothbard 1993).
It is quite different in the other two cases. The second case is that of vital consumption. Money loans to fund vital consumption very clearly raise moral problems from the Christian point of view, because they come up against the commandment to love one’s neighbor as oneself.
Loans to the poor are inherently wrong. A poor person is by definition incapable of ensuring his survival, and that of his family, without being financially supported by his neighbors. This implies that people who find themselves in such a situation are generally unable to repay a loan. It is all the more impossible for them to remunerate it, especially if it would force them into additional debt. Philip Booth (2014, p. 404) has rightly insisted that in such cases the granting of additional credit, the very proposition of such credit, is reprehensible (see also Lauzun 2003, 2012).
The poor do not need loans, they need donations. Those who fund them should give rather than lend. A loan is justified in these cases only by extrinsic reasons, in particular by the concern to respect the dignity of the “borrowers” when they feel morally obliged to reciprocate the gift that is given to them as soon as they have the possibility. This is why Sacred Scripture exhorts the faithful to “lend, hoping for nothing thereby” and the book of Exodus (22:25) warns us: “If thou lend money to any of thy people that is poor, that dwelleth with thee, thou shalt not be hard upon them as an extortioner, nor oppress them with usuries.”
The third case – that of the loan that provides non-essential consumption: purchase of a vehicle, a tourist trip, a home, etc. – does not seem to be problematic with regard to the creditor’s income associated with it. However, for reasons analogous to those that apply to the second case, non-vital consumption, when financed by a loan, is blameworthy from the Christian point of view. Indeed, such consumption is “frivolous” in that it occurs ultimately at the expense of the most fragile members of society.
The frivolous borrower wishes to increase his consumption in the present. If one inquires into the motivation for such anticipated consumption, the answer will often revolve around a sin such as laziness (convenience), greed, or envy. Moreover, and above all, from a global or macroeconomic point of view, these anticipated consumptions reduce the means available to other market participants. Consumption means the destruction of value. The frivolous borrower destroys scarce economic assets beyond the volume he himself has created. It also reduces the means available for production, and this reduction in overall production will particularly affect the most fragile members of society, who depend on abundant production.
The warning of Saint Paul therefore finds its full meaning again. As a rule, the frivolous borrower could over-produce for his own needs; after all, his additional consumption is not vital. If he had produced in excess of his own needs, he could, if necessary, have shared the fruits of his labor with those most in need – whether in the form of directly funding their vital consumption, or in the form of funding production projects. But the frivolous borrower does the opposite. Without necessity he absorbs the excesses of other market participants and also reduces the means available to all the others.
In short, economic analysis validates the “puritanical” conclusions of the classical British economists. From a Christian point of view, it is most appropriate to praise savings, to warn against unnecessary consumption, and to condemn frivolous borrowing and the income associated with it.
The Illegitimacy of Forced Interest Income
But the legitimacy of interest rates can also be vitiated when the loan in question is not taken in full freedom, but rather constrained. This constraint can be direct or indirect, it can be private or public. The case which is by far the most important in practice is that of public constraint exerted indirectly through the monetary system (see Hülsmann 2008).
A fiduciary monetary system tends to inflate credit markets and thereby create artificial income that would not have come into being without monetary interventionism. Mises (1998 [1949]) called this swelling a “credit expansion”. It takes place through two channels: the credit channel and the price-inflation channel.
Central banks, thanks to their printing press, can increase the supply of credit without technical or commercial limitations. By refinancing the banking sector, they facilitate the creation of money by commercial banks and thus allow a multiplication of the volume of loans granted. They have the power to lower interest rates while increasing the volume of credit, as long as there is a demand for additional credit; and they can stimulate this demand by relaxing the conditions for granting their loans (maturities, pledges, counterparties) and by playing the role of a lender of last resort to save those who are excessively indebted (Hülsmann 2006, 2009). As a consequence, credit markets are growing at a much faster rate than would have been possible without the state interventions that put in place the fiat money system and central banks. It is impossible for market participants to circumvent this influence.
The growth of the credit market is reinforced by permanent positive price-inflation rates, which have resulted from expansionary monetary policy in almost all countries after World War II. Permanent price-inflation discourages hoarding and therefore stimulates the supply of loans. But it also stimulates the demand for loans to finance additional investments, because the permanent rise in prices translates, on the aggregate level, into a permanent increase in monetary revenues.
This simultaneous stimulation of both supply and demand on the market for loanable funds has a consequence of the greatest importance: it overrides the natural saturation of capital accumulation. When prices keep rising under the pressure of the printing press, then it is virtually always worthwhile to make more investments funded with more debt if only two conditions are met: (1) that money creation decreases the interest rates far enough and (2) that borrowers can count on the support of central banks to socialize the risks associated with higher indebtedness. In practice, these conditions have prevailed almost without interruption since World War II (details in Hülsmann 2026). It is therefore hardly surprising that financial markets have become literally insatiable. The saturation that would occur in a world without fiat money is overturned. But then this is not a characteristic feature of “capitalism.” On the contrary, it is a consequence of monetary interventionism.
These are the facts. However, the moral outlook on this reality still hinges on one’s understanding of the overall consequences of expanding credit markets.
From a Keynesian perspective, a permanent credit bull market is a salutary phenomenon all in all. Additional income is generated for the financial sector. It is true that this income comes at a cost to other market participants, but this cost is justified by an even greater increase in aggregate revenue. The financial sector wins, but it is not the only winner. Everyone wins or, more precisely, anyone can win through monetary interventionism.
By contrast, from the point of view of classical economics, and more particularly from the point of view of the Austrian School, monetary interventionism does not have any positive overall effects (Hülsmann 2008). Rather, it has two very negative consequences. It redistributes income and wealth (Hülsmann 2014). It redistributes income in favor of those who are economically close to money creation and to the detriment of those who are economically distant from it. It redistributes wealth in favor of those who are relatively well off and to the detriment of those who are relatively poor. Additionally, monetary interventionism stimulates consumption and facilitates the waste of available resources, increasing the risk of inter-temporal disequilibria in the structure of production (Garrison 2001).
This classical and Austrian point of view is ours. In our judgment, most of the income from money lending today is artificial income, which is morally flawed by the fact that it materially depends on state coercion which does not serve the common good. In the language of the social doctrine of the Catholic Church, this constraint is opposed to “social justice.” It facilitates and promotes “structures of sin” (Bichot 2009). With Bernard Dempsey (1943, p. 228) we propose to qualify this income as “institutionalized usury” and to contrast it with the legitimate interest income of the free market (see also Brants 1970 [1881], pp. 145-156).
Of course, we are not passing judgment on the legal implications of this injustice. Personally, we do not believe that unjust institutions invalidate individual contracts made between lenders and borrowers of money. We only insist on the fact that these financial exchanges are morally flawed by the current monetary system. This defect cannot be remedied at the level of individual exchanges. The solution must be for the system as a whole.
III. The Condemnation of Pure Interest Income: A Critique of Aristotelian Theory
We have just presented an economic and ethical analysis of income related to money lending. In our view, these incomes are inherently just and good, but they can be vitiated for various extrinsic reasons, especially in the case of loans to the poor and when loans are artificially stimulated by government interventions.
Unfortunately, this analysis is in its principle diametrically opposed to the doctrine of Aristotle. Aristotle has had a great influence on Catholic thought on the subject (Benedict XIV 1745, Venard 1966, Lavigne 2005), notably through the writings of Saint Thomas Aquinas and Heinrich Pesch, and according [TM2] to these venerable masters, interest income is intrinsically illegitimate and could only be justified for reasons extrinsic to the loan. It is therefore necessary, with the conciseness which is required in the present study, to get to the bottom of this disagreement and to identify its causes.
A. Aristotle
Let us start at the beginning, with Aristotle. In Politics, the Philosopher is vigorously opposed to usury (to the pure income received by the money lender):
[...] for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term usury [tokos], which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of making money this is the most unnatural. (trans. Jowett, 1885, 1258b)
Usury, according to Aristotle, is a particularly detestable way of acquiring money. The acquisition of economic goods is for Aristotle “natural” when it concerns consumer goods. But when the acquisition concerns money, it becomes morally dubious. It is “unnatural” and results “only from the peddling of objects” (ibid.).
What is more, the desire to acquire money is fundamentally disordered because it is based on a confusion between wealth and the abundance of money:
[...] Others maintain that coined money is a mere sham, a thing not natural, but conventional only, because, if the users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food. But how can that be wealth of which a man may have a great abundance and yet perish with hunger, like Midas in the fable, whose insatiable prayer turned everything that was set before him into gold? (1258a)
Aristotle admits that other arts such as medicine also seek out in principle unlimited fruits. But unlike the art of commercial acquisition, these arts are not disorderly: “[...] (but of the means there is a limit, for the end is always the limit), so, too, in this art of money-making there is no limit of the end, which is wealth of the spurious kind, and the acquisition of money.” (1257b)
In the Nicomachean Ethics, Aristotle complements these considerations with a theory of just exchange. Like Plato, he considers that any human community is based on the division of labor among its members. This cooperation requires the exchange of products by specialists. However, according to Aristotle, the exchange can only be sustainable if it is just, and to be just there must be proportional equality between the services (cf. 1133a).
The key word here is “equality.” For Aristotle, equality is the quintessence of justice (cf. 1131a). Also, just exchange is characterized by proportional equality between the goods exchanged. But this raises a fundamental question: how can two goods which are more or less different on the physical plane be equal? Aristotle, while admitting that “in strictness” such equality or commensurability does not exist, asserts that there is a pragmatic solution to this problem. Indeed, it is monetary exchanges that make economic goods comparable and which therefore makes it possible to establish equivalences. He writes:
Money, then, as a standard, serves to reduce things to a common measure, so that equal amounts of each may be taken; for there would be no society if there were no exchange, and no exchange if there were no equality, and no equality if it were not possible to reduce things to a common measure. In strictness, indeed, it is impossible to find any common measure for things so extremely diverse; but our needs give a standard which is sufficiently accurate for practical purposes. There must, then, be some one common symbol for this, and that a conventional symbol; so we call it money (νόμισμα, νόμος). Money makes all things commensurable, for all things are valued in money. (1133b)
To the objection that money itself does not have a stable value and that consequently monetary prices cannot “measure” the values of other goods, he responds thus: “Money is, indeed, subject to the same conditions as other things: its value is not always the same; but still it tends to be more constant than the value of anything else.” (1133b)
In Aristotle’s writings, there is no great synthesis between his considerations of justice, of the disorderly acquisition of money, and of usury. This synthesis is the work of Saint Thomas Aquinas and the scholastic thinkers he inspired.
B. Saint Thomas Aquinas
When he sets out to present his theory of justice, St. Thomas emphasizes the central point: “Equality is the general form of justice…”11 He continues: “On all these actions, whether voluntary or involuntary, the mean is taken in the same way according to the equality of repayment [...].”12
On this foundation, St. Thomas erected his whole theory of justice.13 All discussions of particular issues, such as the sin of injustice in voluntary trade, fraud and usury are directly inferred from this.
In his discussion of fraud, for example, he will raise the question whether it is permissible “to sell a thing for more than its worth” (ST II-II, q. 77, a. 1). His answer:
Now whatever is established for the common advantage, should not be more of a burden to one party than to another, and consequently all contracts between them should observe equality of thing and thing. Again, the quality of a thing that comes into human use is measured by the price given for it, for which purpose money was invented, as stated in Ethic. v, 5. Therefore if either the price exceed the quantity of the thing’s worth, or, conversely, the thing exceed the price, there is no longer the equality of justice: and consequently, to sell a thing for more than its worth, or to buy it for less than its worth, is in itself unjust and unlawful.
Likewise, to the question whether it is “lawful to sell a thing at a higher price than what was paid for it,” St. Thomas again answers with Aristotle that the trade of “money for money, or of any commodity for money [...] for profit” is blameworthy because “considered in itself, it satisfies the greed for gain, which knows no limit and tends to infinity. Hence trading, considered in itself, has a certain debasement attaching thereto, in so far as, by its very nature, it does not imply a virtuous or necessary end.”14
His analysis of usury is still a direct deduction from his axiom of justice: equality of compensation. St. Thomas points out that it is indeed a sin when a creditor receives “money as interest on a loan of money.” Indeed, he asserts:
To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice. In order to make this evident, we must observe that there are certain things the use of which consists in their consumption: thus we consume wine when we use it for drink and we consume wheat when we use it for food. Wherefore in such like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing, is granted the thing itself and for this reason, to lend things of this kind is to transfer the ownership. Accordingly if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. On like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury. (ST II-II, q. 78 a. 1)
In concluding this summary of St. Thomas’ theory, let us note that he was well aware of the objection that usury is after all freely agreed between lender and borrower. St. Thomas rejects this objection with the following argument: “He who gives usury does not give it voluntarily simply, but under a certain necessity, in so far as he needs to borrow money which the owner is unwilling to lend without usury.” (Ibid.)
C. Heinrich Pesch
Among modern Catholic authors, Heinrich Pesch occupies a central place as the founder of the school of thought known as “solidarism” and because of his international influence, especially in the Anglo-Saxon Catholic world. This is why we wish to present and comment on his theory of usury.
Pesch seeks to apply the theory of St. Thomas in the modern context, characterized by industrial production, wage labor, and the presence of large financial markets. For Pesch, as for St. Thomas, there is no fundamental difference between income from loans and other income from capital. The justice or injustice of each is determined in all cases on the basis of the principle of equivalence of services.
In his textbook on political economy, Pesch (1923) discusses entrepreneurial income first (pp. 664-714) and then pure rents, or pure interest income (pp. 715-733). We focus on the latter case.
Pesch argues that, in the contemporary world, moderate usury does not violate commutative justice, respectively aequalitas permutationis (see pp. 716, 726). On the one hand, today, commodity production occupies an incomparably larger place than in the Middle Ages, and it is this that absorbs most of the funds loaned. On the other hand, today everyone has money income, so anyone can lend to producers. Under these conditions, interest is part of the just reward for the loan.15
However, it is always and again necessary to respect the equivalence of services.16 Responding to the question why a remuneration for a loan would be usurious as such, Pesch insists on the necessary equivalence of the goods exchanged in a just exchange: “Where commercial exchange is just, claims and debts appear as an equation. The sign of equality, which here signifies an equality of value, must never contradict reality. Usury begins where this sign loses its veracity.”17
Pesch refers to St. Thomas, to the place of the Summa Theologica that we have already mentioned. Either the creditor is paid for the use of the money he lends, and then he has no right to demand its restitution; or he asks for it to be returned, and then he has no right to ask for anything more. But that is exactly what the usurer does: he demands restitution and compensation.
He rejects without argument the thesis of Böhm-Bawerk according to which the pure interest is a compensation for time preference. He asserts that the mere difference in time between a present good and a future good could not justify (begründen) a difference in value between them (see p. 729).
Pesch recognizes the legitimate reasons for remunerating the lender beyond restitution: (1) The risk premium (Risikoprämie), in other words legitimate compensation for the risk incurred (usura compensatoria) which should therefore be distinguished from the illegitimate usury in the narrow sense (usura lucratoria). But this risk must be a specific and particularly high risk, associated with some concrete loan (periculum sortis). Ordinary business risks (periculum commune etordinarium) do not give any right to compensation. (2) Compensation for what we would now call opportunity costs: the damage suffered as a result of the loan (damnum emergens) and the income not obtained (lucrum cessans). (3) A contractual penalty for late payments.
D. Critical Remarks
The Aristotelian theory of usury, as developed by scholastics and their modern disciples, can be summed up in three propositions: (1) The desire to acquire money is disorderly as such. (2) Money in itself is nothing but an empty thing, having value only by law and not by nature. Therefore, a money loan cannot be justly compensated. (3) Any pure remuneration of a money loan (usury) is unjust because it violates the principle of equal value of services. Let us consider these arguments in their order.
(1) The Desire to Acquire Money is Disorderly Per Se
Aristotle thinks that the interest earned on the loan of money would lead to a more or less automatic multiplication of the capital involved. This mechanism would have no natural limitations. Therefore, the commercial acquisition of money (that is, an acquisition not to exchange it, but to have it) would be disorderly. It would be limited neither by its objective, nor by its means.
However, the economic analysis underlying this reasoning is fallacious. Capital investments do not automatically lead to the expected income, even if this income is promised by a borrower. The accumulation of capital is in practice severely limited by expropriation and investment errors. Even leaving these realities aside, it should be noted that in a natural market economy the accumulation of capital is subject to a powerful saturation mechanism (which Marx called “the law of falling rate of profit”). Notice also that the interaction between supply and demand creates a powerful trend towards a pure return on capital that corresponds to a “just middle ground” of the individual valuations of traded capital.
We have underlined these mechanisms in the first part of this work. It goes without saying that they do not always operate perfectly, but this does not mean they do not exist. And their existence refutes the thesis here in question. In a market economy unhindered by government intervention, the “commercial” acquisition of money, to use Aristotle’s expression, is indeed limited. It is also ordered towards the common good, as we have underlined by presenting the seven aspects of its macroeconomic impact.
On the other hand, and we have also shown this, the monetary interventions of the State undermine these mechanisms and may override them. In an inflationary regime, the “commercial acquisition of money” is indeed disorderly. Aristotle is therefore right about this particular regime, but his argument cannot be generalized to the market economy as a whole.18
(2) Money As Such is a Mere Sham
Aristotle asserts that money has value only by law and not by nature. It is “a thing not natural, but conventional only, because, if the users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food.” He argues that a man can “yet perish with hunger” even if he has a lot of money.
But these claims, too, are fallacious. Money is not the only wealth of which “a man may have a great abundance and yet perish with hunger.” In fact, all the riches that are not edible share this scourge. But who would claim that a family home or a vehicle or a road network is not real wealth?
With an equally untenable reasoning St. Thomas seeks to demonstrate that the payment of interest is always and everywhere done in a coerced and forced manner. It is not just the borrower who “needs to borrow” and it is not only the lender who “is unwilling” to lend without payment. Almost all trade in a market economy exhibits very similar needs and wills. For example, the baker “is unwilling” to give away his breads without payment, and customers pay these prices because they “need to eat.” But is this a coerced and forced exchange? If so, then this “coercion” would be a ubiquitous calamity, not confined to money loans.
Likewise, although it can be said, albeit roughly, that certain types of money (notably those in force in Athens during Aristotle’s time) were fiat monies, the value of which depends on more or less arbitrary political choices, it does not follow that political choices can freely create monetary value; and it does not follow either that there are no natural currencies, the value of which depends solely on the free choices of their producers and their users, and not on any political choice (Mises 1981 [1924], chap. 4).
Aristotle is much closer to the truth when he considers that a society cannot enrich itself by increasing the money stock used on its territory. But, again, this does not imply that money is worthless to the individual members of that society, nor that one can get rid of money without impoverishing society as a whole.
Money is not “sterile,” neither from a microeconomic point of view, nor from a macroeconomic point of view. It is the generally accepted medium of exchange that connects all the people who participate in the exchanges, and which guides their choices. It is quite normal that the borrowing of such a precious economic good is remunerated.
(3) Any Pure Remuneration for Money Loan (Usury) Is Unjust Because It Violates the Principle of the Equal Value of Services
Aristotle observes very clearly that just exchange is necessary for life in society. But he is fundamentally wrong when he asserts that just exchange is characterized by the equality of services. Notice that this is really just an assertion. The great philosopher does not even try to demonstrate it. In fact, the exact opposite is true. As we have explained, in all exchanges, the services rendered have different subjective values. There is never an equality of value between the goods exchanged. Aristotle understood this fact, but he could not admit it. His argument that money makes different economic goods commensurable is no more than a pious fiction, necessary to support the fragile edifice he had erected, but the limitations of which he himself saw very clearly.
If we agree with Aristotle that exchange is characterized (or should be characterized) by the equality of the value of the goods exchanged, then St. Thomas’s argument reads like a rhythmic cadence of syllogisms. St. Thomas considers that it would be fraudulent to sell for higher prices than those at which one bought. He even says that any commercial activity aimed at arbitrating between markets would be illegal. Clearly, there is not much lawful left in the market economy if these basic activities are banned. But St. Thomas’s harsh and restrictive judgment is a direct result of his assumption about the nature of exchange – an exchange of equal values. His theory of usury is a logical continuation of these same considerations.
However, we have to state that St. Thomas’s reasoning on these issues does not stand up to critical examination. The theologians of the Salamanca school (16th and 17th centuries) and the economists of the 18th and 19th centuries such as Condillac and Menger had it right: the value of economic goods is basically a subjective or personal value, and market exchanges in no way demonstrate the equality of the value of the goods exchanged, but, on the contrary, their inequality. And this fact sheds a very different light on commercial activities and on usury.
With the “principle of equality” the whole scholastic theory of exchange, fraud, and usury collapses.19
Conclusion
In this contribution, we have mobilized the tools of economic analysis to identify the moral and immoral elements of interest incomes. We looked at the form of the money loan, the funding it procures and, most importantly, the income it provides.
In our opinion, income from money loans is intrinsically just and good, especially in the case of so-called “pure” income, and both from a microeconomic and macroeconomic point of view. However, the legitimacy of such income can be corrupted by formal vices, and also by factors extrinsic to the nature of the loan. This concerns, in particular, the case of loans to the poor and of loans that are made through unjust institutions.
This result contradicts the doctrine of Aristotle, developed by the scholastics and their followers, which exerted a great influence on Catholic thought in this matter. According to this doctrine, interest income is intrinsically illegitimate and could only be justified for reasons extrinsic to the loan. The reason for the disagreement with our analysis is that Aristotle’s economic reasoning was largely fallacious. Contrary to what Aristotle asserts, market activities are not per se disorderly (although they may become so under the impact of strong monetary interventionism). Likewise, money is not sterile, neither from a microeconomic point of view nor from a macroeconomic point of view. And in particular, his theory of just exchange, which postulates an equality of value between services rendered, is untenable.
References
Aquinas T (1948) Summa Theologica (New York: Benziger Bros.).
Aristotle (1885) The Politics of Aristotle, trans. Jowett. Oxford: Clarendon Press, 2 vols.
——— (1893) Nicomachean Ethics, trans. Peters (5th edition, London: Kegan Paul, Trench, Truebner & Co.).
Atkeson, A. and P.J. Kehoe (2004) “Deflation and Depression: Is There an Empirical Link?” American Economic Review, Papers and Proceedings, vol. 94 (May 2004), pp. 99–103.
Bagus, Philipp (2015) In Defence of Deflation (Berlin: Springer).
Bagus, Ph. and D. Howden (2013) “Some ethical dilemmas of modern banking” Journal of Business Ethics, vol. 22, no. 3, pp. 235–245.
Bagus, Ph., D. Howden and A. Gabriel (2014) “Oil and water do not mix, or : Aliud Est Credere, Aliud Deponere” Journal of Business Ethics, vol. 128, no. 1, pp. 197–206.
Bastiat, Frédéric (1863 [1850]) “Gratuité du credit” Œuvres complètes, tome V (Paris : Guillaumin), pp. 94-335.
Benedict XIV (1745) Vix pervenit.
Bichot, Jacques (2009) “Sollicitudo Rei Socialis: Finances et structures de péché” in P.H. Dembinski, Pratiques Financières, Regards chrétiens (Paris: Desclée de Brouwer, 2009), pp. 59-87.
Böhm-Bawerk, Eugen von (1921) Kapital und Kapitalzins (4. ed, Jena: Fischer).
Booth, Philip (2014) “Catholic Social Teaching and the financial crash” Ph. Booth (ed.), Catholic Social Teaching and the Market Economy (2nded., London: Institute of Economic Affairs), pp. 389-413.
Brants, Victor (1970 [1881]) L’économie politique au Moyen-Age: esquisse des théories économiques professées par les écrivains des XIIIe et XIVe siècles (New York: Franklin).
Cohen, Edward E. (2011) “The Elasticity of the Money Supply at Athens” in W.V. Harris, The Monetary Systems of the Greeks and Romans (Oxford: Oxford University Press), pp. 66-83.
Dempsey, Bernard W. (1943) Interest and Usury (Washington, D.C. : American Council of Public Affairs).
Falise, Michel and Jérôme Régnier (1993) Économie et foi (Paris: Éditions du Centurion).
Fetter, Frank (1977 [1904]) “The Relations between Rent and Interest” Capital, Interest, and Rent (Kansas City: Sheed Andrews and McMeel), pp. 192-221.
Garrison, Roger (2001) Time and Money (London: Routledge).
Herbener, Jeffrey (2011) “Introduction” The Pure Time-Preference Theory of Interest (Auburn, Ala.: Mises Institute), pp. 11-58.
Hochreiter, Gregor (2012) Die abendländische Lehre vom Zinsenverbot (Vienne: Oekonomika-Institut).
Hoppe, H.-H., J.G. Hülsmann and W. Block (1998) “Against Fiduciary Media” Quarterly Journal of Austrian Economics, vol. 1, no. 1, pp. 19-50.
Huerta de Soto, Jesus (2008) Money, Bank Credit, and Economic Cycles (2nded., Auburn, Ala.: Mises Institute).
Hülsmann, Jörg Guido (2002) “A Theory of Interest”Quarterly Journal of Austrian Economics, vol. 5, no. 4, pp. 77-110.
——— (2003) “Has Fractional-Reserve Banking Really Passed the Market Test ?” Independent Review, vol. 7, no. 3, pp. 401-424.
——— (2006) “The Political Economy of Moral Hazard” Politická ekonomie, vol. 54, no. 1, pp. 35-47.
——— (2008) The Ethics of Money Production (Auburn, Ala.: Mises Institute).
——— (2009) “Une crise de l’interventionnisme monétaire et financier” Liberté politique, no. 45 (Summer), pp. 89-96.
——— (2014) “Fiat Money and the Distribution of Incomes and Wealth” D. Howden and J.T. Salerno (eds), The Fed at One Hundred – A Critical View on the Federal Reserve System (Berlin: Springer-Verlag), pp. 127-138.
——— (2016). L’analyse économique et éthique du taux d’intérêt. Document de travail du GRANEM n° 2016-09-055. Université d’Angers.
——— (2024) Abundance, Generosity, and the State (Auburn, Ala.: Mises Institute).
——— (2026) “Three Channels of Asset Inflation” N.S. Kinsella and H.-H. Hoppe (eds), Rothbard at 100: A Tribute and Assessment (Houston: Papinian Press), pp. 53-85.
Hülsmann, J.G. and L. Scrive (2016) “The Ethics of Money Production” A.J.G. Sison (ed.), Handbook of Virtue Ethics in Business and Management (Berlin: Springer).
Knight, Frank H. (1959 [1932]) “Interest” Encyclopedia of the Social Sciences, tome VIII (New York: Macmillan), pp. 131-144.
Köhler, Michael (2015) Humes Dilemma – oder: Das Geld und die Verfassung (Berlin: Duncker & Humblot).
Lapidus, André (1987) “La propriété de la monnaie: doctrine de l’usure et théorie de l’intérêt” Revue économique, vol. 38, no. 6, pp. 1095-1110.
Lauzun, Pierre de (2003) L’Évangile, le chrétien et l’argent (Paris: Éditions du Cerf).
——— (2012) Finance: un regard chrétien (Paris: Embrasure).
Lavigne, Jean-Claude (2005) “Interdit ou toléré? Le prêt à intérêt après Vix Pervenit (1745)” Finance et bien commun, n° 21, pp. 85-92.
Marie-Jeanne, Caroline (2013) “L’interdiction du prêt à intérêt : principes et actualité” Revue d’économie financière, no. 109, pp. 265-282.
Menger, Carl (1871) Grundsätze der Volkswirthschaftslehre (Vienne: Manz).
——— (1883) Untersuchungen zur Methode der Sozialwissenschaften und der politischen Oekonomie insbesondere (Leizpig: Duncker & Humblot).
——— (1968 [1888]) “Zur Theorie des Kapitals” Gesammelte Werke (vol. III, Tübingen: Mohr), pp 135-183.
Mises, Ludwig von (1998 [1949]) Human Action (Auburn, Ala.: Mises Institute).
——— (1981 [1912/1924]) Theory of Money and Credit (Indianapolis: Liberty Fund).
Pesch, Heinrich (1923) Lehrbuch der Nationalökonomie (vol. V, Freiburg: Herder, 1923).
Ramelet, Denis (2005) “La rémunération du capital à la lumière de la doctrine traditionnelle de l’Église catholique” Catholica, no. 86, pp. 13-25.
Rothbard, Murray N. (1993) Man, Economy, and State (3rd ed., Auburn, Ala.: Mises Institute).
——— (2015 [1963]) What Has Government Done to Our Money? (Auburn, Ala.: Mises Institute).
Simmel, Georg (1989 [1900]) Philosophie des Geldes (Francfort: Suhrkamp).
Venard, Marc (1966) “Catholicisme et usure au XVIe siècle” Revue d’histoire de l’Église de France, vol. 52, no. 149, pp. 59-74.
- 1
This hoarding risk premium could take the form of the expectation of a future decline in the price level, to the point that the purchasing power of money would be greater.
- 2Note that we should not read too much into the term “pure” return. It is not a component of the gross return on capital that represents the essence of the return on capital better than the others.
- 3We here neglect the technical aspects of money creation. The expression “printing money” serves as an abbreviation for all forms of creating fiat money.
- 4However, the unfolding of the financial crisis that began in 2008 has shown the limitations of increases in the money supply by way of credit.
- 5The English word “fenerate” is a rare archaism, which, unlike the potentially gratuitous “lend” or “to lend,” etymologically entails the collection of interest. Mr. Turnipseed brings to my attention that most English Bibles, including the Roman Catholic Bibles, have a different wording of this verse. For example, the New American Bible lacks any phrase explicitly meaning “collecting interest” and instead says “you will lend to many nations and borrow from none.”
- 6We have criticized the time-preference theory of interest in Hülsmann (2002). In our opinion, the return on capital manifests a difference in value between the means and the ends of human action. It does not “compensate” for a value that could be defined independently of this fundamental value difference. This criticism also applies to other interpretations of the pure remuneration of a loan, for example, the one proposed by Falise and Régnier (1993, p. 71) who, following Keynesian-type reasoning, consider that pure interest is a compensation for the sacrifice of liquidity.
- 7This expression of “service rendered” comes from Frédéric Bastiat. He applied it in a famous debate with Pierre Joseph Proudhon on the gratuitousness of credit. See Bastiat (1863 [1850]).
- 8It should be noted that this process of growth based on a rise in the savings rate will ceteris paribus go hand in hand with a fall in the level of prices. Here we turn to the discussion of macroeconomic implications. Summarizing the theoretical and empirical work on deflationary growth, it can be said that this fall in prices is essentially beneficial from a global point of view (Atkeson and Kehoe 2004; Bagus 2015; 2008, 2013).
- 9A German criminal law professor recently addressed the issue of the legality of money creation by commercial banks. To his amazement, he came to the conclusion that it contradicts constitutional principles and in fact represents a property crime (Köhler 2015).
- 10The original French reads: “Ce n’est pas le marché financier qui est une structure de péché ; ce sont les institutions et les mœurs qui ont été introduites au sein du marché pour en fausser le fonctionnement, pour introduire de l’obscurité là où le marché requiert une information de bonne qualité.”
- 11ST II-II, q. 61, a. 2. He adds that equality is “wherein distributive and commutative justice agree: but in one we find equality of geometrical proportion, whereas in the other we find equality of arithmetical proportion.”
- 12ST II-II, q. 61, a. 3. Like Aristotle, he underlines the central role of money in determining this equality of compensation: “Nor again would there be equality of passion in voluntary commutations, were one always to exchange one’s chattel for another man’s, because it might happen that the other man’s chattel is much greater than our own: so that it becomes necessary to equalize passion and action in commutations according to a certain proportionate commensuration, for which purpose money was invented. Hence retaliation is in accordance with commutative justice […].” (ST II-II, q. 61, a. 4)
- 13Lapidus (1987, p. 1097) rightly remarks that with Saint Thomas, usury becomes a “logical mistake” even before being a sin and a threat against the civil order.
- 14ST II-II, q. 77, a. 4. He adds an important clarification: “Nevertheless gain which is the end of trading, though not implying, by its nature, anything virtuous or necessary, does not, in itself, connote anything sinful or contrary to virtue: wherefore nothing prevents gain from being directed to some necessary or even virtuous end, and thus trading becomes lawful. Thus, for instance, a man may intend the moderate gain which he seeks to acquire by trading for the upkeep of his household, or for the assistance of the needy: or again, a man may take to trade for some public advantage, for instance, lest his country lack the necessaries of life, and seek gain, not as an end, but as payment for his labor.”
- 15“Der Zins gehört nun mit zur gerechten Gegenleistung.” (P. 726)
- 16“Verletzung der Äquivalenz, der ‘iustitia stricta communtativa’ bleibt jedenfalls auch heute noch das allgemeine wucherische Moment in den zweiseitigen Verträgen.” (P. 732)
- 17“Forderung und Schuld erscheinen im gerechten Tauschverkehr in Form einer Gleichung. Das Gleichheitszeichen, welches hier Wertgleichheit bedeutet, darf niemals zur Lüge werden. Wo es seine Wahrheit einbüßt, beginnt der Wucher.” (P. 721)
- 18Aristotle’s intuition can be explained in light of his personal experience. The Athens of his day featured a very strong monetary interventionism and, therefore, a very elastic deposit money supply (see Cohen 2011). The disorder he saw in market activities is indeed that of an inflationary economy.
- 19More recently, in Hülsmann (2024, chap. 7), I have analyzed Aristotle’s “equivalence postulate” in more detail and shown that it nor only vitiates the doctrine of usury, but also the economic analysis of gratuitous goods.
